5 - Monopoly Flashcards
How can you calculate the price and quantity in a monopolistic economy?
the monopolist chooses price and/or quantity according to their own profit maximization.
-> therefore you either maximize p or x in the monopolist’s profit function (same result)
π(x) = p(x) x - c(x)
or π(p) = x(p) p - c(x(p))
What are complementary goods?
Complementary goods have a negative cross- price elasticity: as the price of one good increases, the demand for the second good decreases.
What are substitute goods?
Substitute goods have a positive cross-price elasticity: as the price of one good increases, the demand for the other good increases.
What are independent goods?
Independent goods have a cross-price elasticity of zero: as the price of one good increases, the demand for the second good is unchanged.
What is the income elasticity of demand?
The income elasticity of demand is the ratio of the percentage change in demand to the percentage change in income.
What are normal goods?
Normal goods have a positive income elasticity of demand (as income increases, the quantity demanded increases).
What are inferior goods?
Inferior goods have a negative income elasticity of demand (as income increases, the quantity demanded decreases).
What are superior goods?
Superior Good: A type of normal good. Demand increases more than proportionally as income rises.
What are necessary goods?
Necessary Good: A type of normal good. An increase in income leads to a smaller than proportional increase in the quantity demanded.
How can you see from the inverse demand function P(x1, x2) whether two goods are substitutes or complements?
If the first good negatively influences the price of the second good, it means that the producer can sell more of the second good despite a higher price! i.e. P1(x1, x2)= x2 - x1
